Fixate on this wireless wonder

BambiFrancisco

BALTIMORE (CBS.MW) – If scientists and philosophers were to fix their curiosity on Internet stocks, they wouldn’t be disappointed in the amount of arbitrary, abstract and contradictory matter permeating this space.

So, let’s muse upon this question, shall we? It’s not whether Aether exists, but should one invest in it?

In hindsight, last autumn would have been the perfect time. But who knew?

Last October, 3-year-old Aether Systems (AETH), a leading wireless data service company, was just an atom when it went public at $16 for a market value of $418 million. Of course, only investors could get in above and beyond that IPO price. But even 69 ½ (where Aether’s stock traded on average over the one week period following the IPO) seems reasonable, in hindsight. But OK, who knew?

And now, in molecular fashion, the stock has amassed a market valuation of $6.5 billion. It’s a far cry from being a subatomic particle four years ago when its private market valuation was $10 million at its first round of financing. But who knew? For that matter, who could invest?

The question now is will we all be saying, “Who knew?” one year from now… if the company is worth $10 billion.

Aether Systems’ analyst day

Aether Systems is one of the leading wireless players as an enabler of mobile data with enough capital -- about $1.2 billion in cash -- to kill off enemies, or buy them. The company just held its first analyst day in Baltimore on Monday. More than 100 analysts attended, I’m told. (I only make it out that way for the Kemper Open).

The gathering was kicked off with perfunctory announcements including new strategies, new acquisitions and new clients.

Aether announced that it would buy Cerulean Technologies for $150 million. It’s the company’s fifth acquisition and is its entry into the mobile government market. Hmm. I envision policemen armed with Palm pilots and finding new applications for infrared technology.

It also announced a new client, General Electric, through its I-builder partner Proxicom (PXCM). And Aether announced plans to invest $15 million in Parkstone Medical Information Systems to wire the country’s physicians. Parkstone has developed a prescription writing application that links physicians with pharmacies, such as CVS or Rite-Aid. About 1,000 physicians currently use the device to manage prescriptions.

Aether Capital, the company’s new unit to house Aether’s acquisitions, was also unveiled. Aether has invested about $250 million in the past 12 months in about nine (two public, three private, four jointly created with partners). It’s all in an effort to build up a wireless technology platform and buy domain expertise in particular verticals. Wayne Jackson, the CEO of Riverbed Technologies, one of Aether’s acquisitions, will be the Aether’s M&A maestro.

“We’ll have an Aether economy where these companies work together and feed off each other,” said David Oros, founder and CEO of Aether Systems.

Oros added that the $250 million invested has a market valuation of some $1 billion. That valuation, of course, depends on the market’s finicky appetite of late. Still, even if these deals can get out the IPO door, it’s not guaranteed the valuations stay there. See Aether’s investments.

These are solid announcements and another step towards being a leading player in delivering mobile data services in different verticals from brokerage, health care, trucking and transportation, and now public safety.

But as one analyst said to me earlier, contracts don’t feed the cat.

Aether, of course, isn’t saying it does, just yet. In fact, it told analysts that it will give revenue guidance some time in the third quarter. It’s likely, those revenue estimates will be raised when the company has better visibility. It is, after all, early in the game.

For now, the company is expected to generate $42.7 million for this year, and more than double that to $100 million by 2001. To date, Aether has generated $16.1 million in the first half of this year.

Based on a price of 149, which works out to an enterprise value of $5.6 billion, Aether appears to be priced for perfection at an enterprise-to-sales multiple of 56 times.

Mobile wireless data valuations

Company

symbol

Enterprise value

Sales (’01)

Enterprise value-to-sales

Aether Systems

AETH

$5.6 billion

$100 million

56 x

7/24 Solutions

SVNX

$972 million

$50 million

19x

InfoSpace

INSP

$7.2 billion

$210 million

34x

Puma Tech.

PUMA

$765 million

$55 million

14x

Phone.com

PHCM

$8.3 billion

$247 million

34x

Apparently, investors like this company. And actually, I do too.

But if history is any guide, (and the more historical perspective we can apply to this space, the better) that market cap is reasonable only if multiples don’t contract.

Contracting multiples

Multiples do contract even if fundamentals are strong, cautioned Ian Toll, an analyst at CS First Boston, who’s watched his once-beloved B2B space shrivel. Consider the best-case scenario: Ariba (ARBA), the leader in the business-to-business software industry, traded at 107 times 2001 revenue during March madness.

“There is a false sense of security based on the fact that the fundamental underlying performance is fine,” said Toll.

To wit: back in March, Toll had estimated that Ariba would generate $250 million in 2001. Now, Toll’s ’01 revenue estimate is double that, or $547 million. Yet, Ariba’s multiple has contracted to 60 times. “Investors shouldn’t be afraid that stocks will run away from them,” he added.

Moreover, the larger players such as IBM (IBM) and EDS (EDS) could prove to be challenging when they enter in a big way, Oros admits.

One could argue, however, that those concerns are discounted and that multiples have already contracted to reflect those concerns and others.

So, if other notable wireless leaders, such as InfoSpace (INSP) and Phone.com (PHCM), are any guide, perhaps 34 times next year’s sales is a reasonable benchmark.

If that’s the case, then Aether needs to generate $300 million in sales by 2002. Because if it does, then applying a 34 times forward sales would be equate to a market value north of $10 billion by 2001.

If those sales sound reasonable, and investors want to play venture capitalist odds, then Aether is a fine choice.

As Merrill Lynch’s analyst Henry Blodget once cautioned: Internet stocks are like venture investing. Venture capitalists invest with the risk assumption that 70 percent of their portfolio will fail.

It’s a solid company, said W.R. Hambrecht’s Peter Friedland, who has a “buy” rating on the stock. “It’s the valuation that may be tough for value-oriented investors.”

(In the upcoming articles, I will be discussing what readers feel are the best applications that make sense on a wireless device. Feel free to e-mail).

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